FTC green-lights Big Three Net exchange

After a six-month investigation that cast shadows over the broader business-to-business e-commerce sector, the Federal Trade Commission approves Covisint, an online marketplace for automakers and suppliers.

3 January 200211:43 am AEDT

After a six-month investigation that cast shadows over the broader business-to-business e-commerce sector, the Federal Trade Commission today approved Covisint, an online marketplace for automakers and suppliers.

The FTC attached no conditions to the joint venture but will closely monitor it, said FTC spokeswoman Claudia Bourne Farrell.

Meta Group says Covisint, the business-to-business Internet exchange formed by
the three largest U.S. automakers, appears to be benefiting from the novelty
factor in getting a relatively fast and painless review from the FTC.

Covisint is still under review by the Bundeskartellamt (BKA), Germany?s antitrust regulatory agency. BKA approval, which is expected in the upcoming months, is the last step before the company proceeds with recruitment and other critical business plans.

When and if Covisint gets approval from the BKA, it will select a chief executive officer and begin bulking up its 200-person staff, which comprises employees on loan from the automakers. Now operating out of a temporary headquarters in Southfield, Mich., the eight-month-old company will also try to find a permanent home after a BKA decision.

Covisint, which is expected to handle several hundred million dollars per year in purchasing, is the latest in a spate of moves by automakers to harness the power of the Internet. The automakers and their technology partners, Commerce One and Oracle, provided all of the start-up funds for Covisint. Commerce One and Oracle each have about 50 people dedicated to the project.

The automakers building the marketplace--General Motors, Ford Motor, DaimlerChrysler, Renault and Nissan--spend an estimated $300 billion on parts and related expenses each year. Covisint hopes to woo other automakers into the marketplace, particularly Toyota, Japan's largest automaker and a company renowned for its supply-side efficiencies.

A Covisint planning executive would not disclose the expected cost savings from the venture, which has about 25 participating suppliers. Roughly 30,000 separate companies provide parts and services to the global automobile industry.

"We would certainly like to have all of the suppliers involved," said Alice Miles, a member of the Covisint executive planning team. "We see it growing as we're able to communicate what an exchange does...We have a large amount of communication that needs to be done with everyone in the supply chain, and we intend to get started on that right now."

A typical Covisint transaction will proceed in a reverse auction format, with an automaker or supplier describing a part or service it desires and collecting a series of decreasing bids from smaller manufacturers. Any party with excess inventory or other services it wants to sell may use the site for forward auctions. Covisint has not yet determined whether to charge transaction fees or monthly subscription fees, or both, Miles said.

Automakers and suppliers soliciting bids must preapprove all parties that participate in the exchange. After bids are finalized, automakers and suppliers may continue the process on private Web sites that Covisint develops and maintains. Executives say Covisint could evolve into a giant portal for all business transactions in the automotive industry--not just purchasing and supply tasks.

Covisint executives say the site's auction and procurement functions will reduce unwanted inventory and slash bureaucracy and cost. According to Ford research, labor and paperwork costs associated with a single purchase order average $150. The cost of the same transaction online: $5 to $15.

It?s not clear, however, whether significant cost savings will translate directly to consumers in the form of lower prices on cars and trucks.

During a phone conference this afternoon, a reporter asked Miles whether cost savings would be passed to consumers. Miles, a Ford veteran on loan to Covisint, said Covisint may speed the amount of time it takes to build and deliver custom orders, but she wouldn?t speculate on sticker-price reductions.

"I wouldn?t speak for Ford on that," Miles said. "We all know how many inefficiencies there are throughout the supply chain...If we start looking at that, we all believe the consumer will win."

The FTC?s approval is the first for a large business-to-business exchange, and experts say it will pave the way for similar exchanges.

"This clears the regulatory hurdle out of the way for other marketplaces to move forward," said Steven Kafka, an analyst at Forrester Research. "I think a lot of other marketplaces were slowed down by the FTC's inquiry into Covisint as they waited (for the) outcome. Covisint is the bellwether for other industries doing similar ventures.

"This was the first e-marketplace to bring competitors together to do this. With regulatory approval comes the assurance" for others that they can do it too, he said.

Covisint came under scrutiny from the FTC and the antitrust divisions of the U.S. Department of Justice and the European Commission almost as soon as it was formed. Regulators initially feared that the major auto manufacturers would use the exchange to dictate which pricing models and purchasing practices suppliers must use.

Miles dismissed concerns from small companies participating in the trillion-dollar auto industry, saying that the automakers and the industry's largest suppliers will not use Covisint to gouge smaller players. She said that small suppliers could profit by taking advantage of Covisint services that enable members to have home pages on the Web and communicate with faraway clients.

Covisint had originally planned to be operational by June. However, regulatory concerns and personnel shifts have interfered with the company's schedule.
Last month, the FTC requested more information from the automakers backing the exchange.

The fledgling company is also struggling with recruitment--one of the biggest challenges for any technology company in the full-employment economy. Alan Turfe, one of three original co-chief executives of Covisint, left in July to become president and chief executive of MetalSpectrum, a metals industry exchange.

The company is looking outside of the auto industry for its top executive, and it is also looking for sales and marketing employees who are familiar with selling Internet-based products and services--vastly different physical products such as pistons and transmissions.

"It takes a while to get the wheels turning and everything done," Miles said. "We need resources that are not only technical...but we need other skill sets that we may not have had in the founding partners, even from a sales perspective."

Covisint had originally planned an initial public offering sometime this year. Now the exchange, which will operate as an independent company, will
not launch its IPO until next year.

Automakers had downplayed antitrust concerns surrounding the exchange. Covisint executives maintained that the company would not run afoul of
antitrust laws because the exchange is open to other manufacturers.

In its final analysis, the FTC found that the company will bring new efficiencies that would drive down costs, Farrell said.

"This does validate what e-marketplaces can do for the consumer," Kafka said. "The FTC found that these ventures can cut costs and build efficiencies, which will benefit the end consumer."